Saturday, November 10, 2007

Crocs Takes a Nosedive

by Osman Parvez
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As you may recall, I've written about the virtuous cycle of entrepreneurship and how it benefits our local community before. Here in Boulder, we're fortunate to have had many success stories. We've even developed a bit of a reputation for being fertile ground for startups.

In the virtuous cycle, founders, investors, and early employees share the benefit of their success by seeding new ventures and reinvesting in the community in a myriad ways. It's a wonderful thing. Unfortunately, a bit of an opposite effect can occur when a high flying local company takes a nosedive.

That's what happened last week to Niwot based Crocs (CROX) when its stock plunged from ~$75 to below $40. In just over a week, more than $3 Bn (that's billion) was erased as Wall Street mercilessly slaughtered the stock. Ouch!

What happened? The company missed Wall Street analyst estimates. To make matters worse, expectations among investors had built for blow-out earnings prior to results being released. When the news hit, the stock plummeted.

What's the local impact? Co-Founder George Boedecker saw the value of his holdings (2.2MM shares as of June) fall by $82MM last week. As of December 31, 2006, the company had reserved 4.5MM shares for future issuance on exercise of outstanding options under equity compensation plans. Those shares lost $172MM in value (calculated on their weighted average strike price). Talk about a disheartening week at CROX.

But that's the short term.

Here's the good news. Athough CROX missed estimates, the company's financial performance and growth remains strong. For local employees and investors, and for the virtuous cycle, the long term is promising. Last quarter, CROX reported gross margin of 61% and net income of $56.5MM, up 16% over the previous quarter. Although well established in the United States, the company is just getting started globally and indications of demand are strong. Meanwhile, less than half of the company's revenue is derived from the original shoes. They've been quite busy diversifying their product line. CROX has also acquired several creative growth companies it will leverage into new products.

As you probably already know, in the earnings release the company increased guidance for 2007 EPS to $1.94 - $1.98 on revenue of $820MM -$830MM. CROX had previously estimated EPS of $1.89-$1.93 on revenue of $810MM - $820MM. As of Friday's close, CROX's trailing 12 month PE ratio is at a historic low (see chart below). In addition to the long term growth potential, the low PE suggests some short term upside to CROX. The company delivered their terrible news onWe're probably beyond the dead cat bounce at this point.



Note: Founded in 1999, Crocs is most well known for their funky looking foam rubber shoes. In the U.S., the company sells its shoes, apparel, and accessories through ~6,500 domestic retail store locations. Outside of the U.S., the company sells its products through approximately 1,500 international retail store locations. The company operates primarily in Australia, Austria, the Caribbean, France, Germany, Hong Kong, Japan, the Netherlands, Singapore, and the United Kingdom.

Images: Bloomberg and CapitalIQ

Full disclosure: I'm long shares of CROX.


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3 comments:

  1. This comment has been removed by a blog administrator.

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  2. Oops, just realized that last comment was spam. Carry on!

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  3. I don't really understand all that wall street crap but I'm just going to say that I am sad to say they have outsourced their manufacturing to China. I know it was bound to happen sometime, but part of the thrill of Crocs (for me) was that they were made in the good ol' US. I'm going to have a hard to supporting their move. Plus even the "Specialist" version of their shoes can't hold up on a hard hospital floor.

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